March 25, 2025 - The fourth article in our Governance Best Practices for Not-for-Profit Organizations Series covers the responsibilities of a governing body and how effective structuring of a board rests on factors including its size, diverse makeup, and the independence of its members. Please watch for additional articles in our series, which cover topics such as: crafting a mission statement, document retention and destruction policies, executive compensation, conflicts of interest, and establishing a whistleblower policy.

An NFP’s governing body is responsible for overseeing its operations and finances. An active and engaged board is critical to the success of an organization and its compliance with applicable regulatory requirements. Successful boards include individuals who possess expertise in the various dimensions that the NFP needs access to such as accounting, finance, compensation, fundraising, and investments.

The needs of the organization should be considered when determining the appropriate size of the board. Small boards run the risk of not having adequate diversity to effectively govern the organization and very large boards may have a hard time reaching the consensus to make decisions. Regardless of size, a governing board should be composed of independent members and not be dominated by employees or others that are impacted by family or business relationships.

An NFP’s Form 990 discloses the number of governing body members as of the end of the tax year, as well as the number of such members that are independent. For this purpose, independence generally means that the individual does not receive compensation from the organization or any of its related organizations. Certain transactions with related parties of board members (such as their family members and companies they own) are required to be disclosed in the Form 990 and can also impact independence.

Also disclosed is whether there were any family or business relationships between board members and the identity of such individuals. An organization must also confirm in its Form 990 whether it contemporaneously documented the meetings and written actions of the governing body and any committees which had the authority to act on behalf of the governing body.

While it is important to remember that the way your governing board is established and structured is not required by the IRS to obtain or maintain exempt status, an NFP which has refined the structure of its governing board is putting its best foot forward in the eyes of its many stakeholders. If you work with a not-for-profit in an oversight capacity, be sure to take some time for an annual review of the policies that are currently in place, consider updating them as your organization matures, and if any of these policies are not in place, consider adding them. Also, regularly review your organization’s Form 990 to be sure its disclosures regarding board member independence and board meeting documentation practices are complete and consistent with your understanding of how the practices are carried out.

If you have any questions, please reach out to your Citrin Cooperman advisor. Our Not-For-Profit Industry Practice will work with your organization to ensure the best policies are in place to support future growth and success.

An important note on governance issues

Not-for-profit organizations (NFPs) face scrutiny from a multitude of perspectives – the Internal Revenue Service (IRS), the legislature, watchdog organizations, donors, news media, and the states in which they operate. Because the annual information return (Form 990) filed by most NFPs is readily available on the internet, these stakeholders have easy access to data about an organization’s operations which they can use to make judgements about it. The first line of defense is the establishment of good governance practices which are regularly followed.

Although the federal tax laws do not require the adoption of any particular policies or procedures, it is essential for an NFP to carefully consider which governance practices are most appropriate to enable the organization to operate in an effective and compliant manner. Additionally, since the Form 990 discloses information about a number of governance-related items, not only have they become the de facto best practices for NFPs, there will be many data points from which readers of the form can draw conclusions about the organization.

Therefore, it is not only crucial for an NFP to establish good governance practices, it must also prepare its Form 990 while disclosing these practices effectively. This series explores the key governance areas disclosed in the Form 990 and highlights important considerations for not-for-profit organizations.